Surprised like I was when, in the deepest point of a recession, big Banks suddenly start posting huge profits? Well, I have written previously on the mark-to-market rule which allows banks to report failing mortgage loans at alleged “normal” market values instead of real current values—thus magically eliminating billion-dollar losses from their eanrings reports. But the rule won’t affect reports until 2Q (so I’ve heard), so how in the world does say, Wells Fargo, posts record profits in the 1Q? Bloomberg journalist Jonathan Weil has exposed the all-but-fraudulent accounting behind it. I link to his article below.
In short, Wells Fargo used a little-known and since-banned rule to count billions in losses from the books of Wachovia (whom WF acquired) as gains!—the logic being, again, that at “normal” market prices, these acquired losses will trun out as profits. Even more creepily, WF vaunted its common-equity value from 13.5 billion to 36 nillion with no explanation despite being required by law to show the numbers. Worse again, they have hidden 44 billion of assets labeled as “other” in a footnote with absolutely no explanation of what’s in that package. Could it be mortgage-backed securities desitned for losses? Silence.
The market blasted off when WF announced its “record profits.” This morning, similarly, Bank of America announced 1Q profits, saying it “surpassed Street,” meaning, beat Wall Street’s expectations. But the fine print says that BoA included 13.4 billion in expected loan losses, which could be way to small considering it accepted 45 billion in bailout money already.
Meanwhile, Goldman Sachs reported 1Q profits, too, but remember that they switched from being strictly an investment firm to being a classic deposit bank so it could receive bailout money. In doing so, it got to secretly skip an entire month’s worth of loan losses for it’s balance-sheet report.
So, are these big Banks beating the street? or are they just fooling us all. Considering that the market has already started to sell off BoA shares despite its report of profits, I’d say the ball-under-the-shell game is losing its audience real fast.
Read Weil’s Bloomberg article here.
Joel McDurmon, M.Div., Reformed Episcopal Theological Seminary, is the Director of Research for American Vision. He has authored four books and also serves as a lecturer and regular contributor to the American Vision website. He joined American Vision's staff in the June of 2008. Joel and his wife and three sons live in Dallas, Georgia. 
